Another poor payrolls report leaves us again questioning if the path of tapering is to be tapered. In other words, the hope that the Fed may continue to buy $65 billion bonds per month, rather than cut $10 billion per month going forward, has given the equity markets hope once more, and those who have wanted to buy the dip have done so in earnest.
Even emerging markets (EM) are finding buyers and could see better days this week after a 15th week of net outflows. In this space a rising tide has lifted all ships of late and all currencies, regardless of fundamentals, have been savaged. However, I feel it is time to look at the EM space more selectively and while there will be currencies and equity markets which continue to see lower lows, there will be others that are in a much more compelling space, such as the Korean won and Philippine peso.
The fact that the Fed funds future is now only pricing 55 basis points of hikes from the Fed by December 2015 has got to be good for EM and developed markets, given this is now 20 basis points below the Federal Reserve’s own consensus. Personally I would rather see a market pricing in more aggressive hikes as a consequence of a more positive view on the US economy. It is also making Jeffery Lacker’s call for the funds rate to be at 2% by 2015 rather poor.
Poor jobs report not just a function of weather patterns
The talk on the trading floor today (as I’m sure it was in the US and Europe) was whether the print was – and to what degree – affected by the cold weather. The fact that construction jobs were up 48,000 in January has led many to believe the headline print was actually just a poor number. However the bulls have countered this by looking at the upbeat household survey (+638,000), which contributed in the small fall in the unemployment rate, despite an increase in the participation rate. Overall the payrolls seem to have been enough to push the S&P 500 to reclaim the 2012 uptrend. A subsequent break of the 1807-1813 area on the S&P 500 should see new highs being seen in the market.
Asia has responded with China (CSI 300 currently up 2.3%) providing the backbone and the platform for the bid to stay in other asset classes. There hasn’t been any renewed bid in AUD/USD today and there are plenty of domestic factors to focus on this week for AUD traders other than China, although China is always a key input for direction.
The pair looks strong at present with the MACD moving above zero on the daily chart for the first time this year and the bulls will be looking for a close above 0.9079 (the 38.2% retracement of the October to January sell-off). A break of this level should take the pair through the 0.9120 area, which is significant as this is the level where the RBA increased the level of concern around the AUD, noting in previous statements that the AUD was ‘uncomfortably high’.
The ASX has put on 1.1% today and it promises to be a big week for the local market, with a trading update from ANZ tomorrow and earnings from CBA, CSL, BLD, OZL, PRY, RIO, TLS and NCM due. The bears will point to the good levels of selling that came into the market at 5214, just around the 50% retracement of the 5383-5052 sell-off seen this year, however as the day went on buyers returned with the index closing easily at its high. Whether that is simply pre-positioning ahead of the raft of key earnings is not clear, but judging by the late tick in the post market auction someone was in bullish mood today.
Europe looking at a strong equity market open
Europe should open firmly on the front foot with data on the light side; only French and Italian industrial production and Spanish trade balance numbers are due. There has been talk on the floors about the German Constitutional Court referring the OMT (Outright Monetary Transaction) case to the European Court of Justice. While the German court went out of their way to highlight a range of issues they have, the market views the announcement as EUR positive at the margin as the Court of Justice should have a view more aligned with the ECB, who naturally feel the OMT is one of the best policy tools crafted from a central bank.
Still, this saga has been going on for some time and many in the market have simply tuned out, however as we saw on Friday it still provokes a reaction. In terms of price action, EUR/USD continues to struggle to break 1.3687 (or the 38.2% retracement of the December to February falls), although 1.3700 seems to be the level the market has been more than happy to sell above this year.
Keep an eye on Air France, given the announcement of the month-long French pilots’ strike through May, as they protest laws set to prohibit future pilot strikes. You simply can’t make this story up, but it could put pressure on the French carrier on open.